Derivatives

What does rollover mean in futures contracts

Akhil Nallamuthu BL Research Bureau | Updated on June 12, 2021

Traders opt to rollover if they expect the existing trend, whether bullish or bearish, to continue

Rollover in futures means closing out the nearest expiry contract and initiating a similar position in the next month contract. Traders opt to rollover if they expect the existing trend, whether bullish or bearish, to continue. This is commonly done on the expiry day. Rollover is calculated by adding the mid and far month outstanding open interests, dividing it by the sum of current, mid, and far month outstanding open interests and multiplying by 100.

For instance, you hold a long position in June expiry Nifty 50 futures and on expiry day (i.e., on June 24) you expect the futures to rally further. To capitalise on this, you can liquidate the current month contract, which is June series, and create a fresh long position in July or even August series depending upon your expectations. Similarly, if you have short and you forecast the contract to weaken further, you can exit from current month contract to next month contract.

For traders, rollover percentage is important as it can give a good idea about the strength of the prevailing trend. If the rollover from the previous month to the current month is 70 per cent and the rollover from the current month to next month goes up to 80 per cent, and the futures price has been steadily increasing — this is a bullish indication. Therefore, the rollover percentage alone cannot be relied on but it should be seen in conjunction with the price movement.

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Published on June 12, 2021

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